I’m a tax lawyer based in San Francisco (www.WoodLLP.com), but I handle tax matters everywhere. I enjoy untangling a tax mess from the past, disputing taxes with the government or planning taxes for the future. One of my specialties is advising about lawsuit payments. Whether you’re receiving or paying a legal settlement, you can probably improve your tax position. I write frequently about taxes, from expatriation to sales tax, from selling your company to restitution. I’ve written over 30 tax books, but my best seller is still Taxation of Damage Awards and Settlement Payments. Contact me at wood@WoodLLP.com.

IRS Announces Better Offshore Amnesty Program

The IRS has rolled out important changes to its successful offshore account amnesty programs. How successful have they been for the IRS? More than 45,000 taxpayers have fixed their tax problems via the IRS programs, paying about $6.5 billion in taxes, interest and penalties.

As FATCA and global bank transparency kick in July 1, 2014, the IRS can expect even more mea culpas. But one group unhappy with the rules so far has been expats. Americans abroad have long complained that they have foreign accounts for legitimate reasons and shouldn’t be penalized for technical reporting failures.

Expats should be pleased that the IRS’s Streamlined Program, a big disappointment when announced in 2012, is now a good deal broader. The original streamlined procedures announced in 2012 were available only to non-resident, non-filers. For many, that was a non-starter. Plus, there were different degrees of review based on the amount of tax due and the taxpayer’s response to a risk questionnaire.

The revamped Streamlined Program is broader. It can even apply to some people living in the U.S. Moreover, the expanded streamlined procedures are available to more U.S. taxpayers living abroad. The changes include:

Eliminating the rule that the taxpayer have $1,500 or less of unpaid tax per year;

Eliminating the required risk questionnaire;

Requiring the taxpayer to certify that previous failures to comply were due to non-willful conduct.

For eligible U.S. taxpayers residing outside the U.S., all penalties will be waived. For eligible U.S. taxpayers residing in the U.S., the only penalty will be a miscellaneous offshore penalty equal to 5% of the foreign financial assets that gave rise to the tax compliance issue.

Expat or not, for many U.S. persons with foreign income and accounts, it’s clear that compliance is required. But a primary fear is precisely how to begin in a way that is not too expensive and not too risky. The IRS view is that either the OVDP or the Streamlined Program is best.

That remains true. After all, the IRS programs are certain which is worth a lot. But some taxpayers still want to explore alternatives.

Prospective Compliance. Some people consider filing complete tax returns and FBARs prospectively, but not trying to fix the past. However, the risk is that past non-compliance will be noticed and it may then be too late to make a voluntary disclosure.

Voluntary Disclosure. The two IRS programs are worth considering, especially under the Revised IRS Voluntary Disclosure Practice. Each program is worth a look. After all, although criminal cases are rare, FBAR violations and tax violations can both be criminal.

You can have money and investments anywhere in the world as long as you disclose them. Get some professional advice and try to get your situation resolved in a way that makes sense for your facts and your risk profile.

You can reach me at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

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It will be interesting to see whether the “Enhanced Streamlined” program attracts more compliance. At first blush, one would think that it would. But, I’m not sure.

Once in the U.S. tax system, Americans abroad have effectively disabled themselves from any retirement planning in their countries of residence and committed to a very expensive long term undertaking. Furthermore, there is the time, the constant threat and fear of penalties once they are tax compliant.

With U.S. style citizenship-ship based taxation (American exceptionalism -not the kinder version of Eritrea) long term compliance is impossible anyway.

Therefore, the enhancements to the streamlined program will be clearly used by those wishing to renounce U.S. citizenship.

Think about it:

Americans abroad will obey U.S. tax laws so that they can no longer be American.

FromPtoEX: Couldn’t agree more. Also can you trust what the IRS is actually offering? Obviously they destroyed anyone foolish enough to enter the OVDP. Why is RBT so disdainful to them? Must they always deem themselves exceptional and contrary to universal norms?

It seems the US has enough problems without spending precious funds and energy trying to extort pennies out of law abiding folks living/working abroad. A cost benefit analysis was never done for FATCA.

I am so thankful that the US has decided to go easier and open new pathways for extorting funds that do not belong to them. One can only marvel at their exceptionalism.

And for folks in the OVDP black hole (either pre-clearance or complete submission) but without a closing agreement? Can they withdraw and reroute their course towards Streamlined or must they formally opt-out and go through normal penalty and mitigation?

How is this for irony: “Eritrea consulate still extorting ‘diaspora tax’ in Canada, a year after top diplomat expelled over scheme” (National Post Canada). So I guess if you have big bombs and a huge economy you are allowed to do anything you want, otherwise your consulate is expelled and you are told to “go fish”, why this is extortion!

Shouldn’t we all be playing by the same rules? Seems the US also told Eritrea no way, guess the US wanted to be the only person at the table. US=Good, Eritrea=bad

This new program is still full of risk for people wanting to come into compliance. If the IRS rejects you from the program you will be liable for the 50% penalites. I don’t see anything good about this. The IRS gives 0% penaty upfront, but then raises penalties if you don’t comply or if they kick you out of the program. Again it is all in favor of the IRS, not the taxpayer. Congress is ultimately responsible for this mess, but the IRS could have done a little better. There are too many things that IRS could find willful, that the unknowing taxpayer may fall trap to…

Yes, I agree that there are dangers. I don’t agree that there’s nothing good in the new program. I do think it makes decision making harder, and perhaps puts even more of a premium on full disclosure and thoughtful risk assessment. I agree that Congress should step in to try to fix it. But realistically, I’m afraid there is no serious chance that will happen.